Court upholds Deputy Commissioner's order for special audit under Income Tax Act, finding it legal and not arbitrary.

The court upheld the Deputy Commissioner of Income Tax's order directing a special audit under Section 142(2A) of the Income Tax Act, 1961. The court found that the order was legal, based on objective criteria, and not arbitrary. It dismissed the writ petitions challenging the order, stating that the Assessing Officer's discretion was exercised reasonably, and the Petitioner had been given adequate opportunity to respond. The court emphasized the importance of the specialized nature of the business activities and the interests of revenue in justifying the special audit.

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Issues Involved:
1. Legality of the order directing special audit under Section 142(2A) of the Income Tax Act, 1961.
2. Alleged violation of principles of natural justice.
3. Complexity and volume of accounts.
4. Specialized nature of business activities.
5. Interests of revenue and allegations of fund diversion/siphoning.
6. Adequacy of reasons for directing special audit.
7. Scope of judicial review under Article 226 of the Constitution of India.

Detailed Analysis:

Legality of the Order Directing Special Audit
The petitions under Article 226 of the Constitution challenge the orders dated 06.08.2019 by the Deputy Commissioner of Income Tax directing the Petitioners to have their books of account audited by a Special Auditor under Section 142(2A) of the Income Tax Act, 1961. The court noted that the Assessing Officer (AO) must form an opinion based on objective criteria, not subjective satisfaction, to direct a special audit. The AO's discretion must be exercised reasonably, taking into account all relevant aspects.

Alleged Violation of Principles of Natural Justice
The Petitioner argued that the order was passed without affording a reasonable opportunity of being heard, thus violating the principles of natural justice. However, the court found that the Petitioner was given sufficient opportunity to respond to the show-cause notices and queries raised by the AO. The AO issued multiple notices and show-cause letters, and the Petitioner had the opportunity to furnish explanations and documents.

Complexity and Volume of Accounts
The AO noted various anomalies and complexities in the Petitioner’s accounts, such as significant loans and advances, investments in subsidiaries, and shared expenses with associated concerns. The AO highlighted the large volume of transactions and the specialized nature of the business, which warranted a special audit. The court emphasized that the AO's determination of complexity is primarily within his domain and should not be interfered with unless it is arbitrary or perverse.

Specialized Nature of Business Activities
The Petitioner’s business involved financing, lending, and investment activities, which are specialized in nature. The AO observed that the Petitioner’s transactions with associated concerns and the rotation of money through various companies indicated a need for in-depth verification. The court upheld that the specialized nature of the business justified the need for a special audit.

Interests of Revenue and Allegations of Fund Diversion/Siphoning
The AO referred to a forensic audit report by SEBI, which indicated diversion and siphoning of funds by the Petitioner. The AO considered this to protect the interests of revenue. The court noted that the forensic audit report and the ongoing inquiries by various government agencies supported the AO’s decision to order a special audit.

Adequacy of Reasons for Directing Special Audit
The AO provided detailed reasons for directing the special audit, including the complexity and volume of accounts, specialized nature of the business, and interests of revenue. The court found that the AO’s reasons were cogent and based on objective assessment. The AO’s order was not arbitrary or mechanical but reflected a genuine attempt to understand the accounts.

Scope of Judicial Review under Article 226
The court reiterated that under Article 226, it does not sit in appeal over the AO’s decision but examines whether the AO exercised his discretion objectively. The court found no perversity or arbitrariness in the AO’s order. The AO’s decision was based on valid material and objective criteria, and the court would not interfere with it.

Conclusion
The court dismissed the writ petitions, holding that the AO’s order directing the special audit was justified and based on objective criteria. The Petitioner was given sufficient opportunity to be heard, and the AO’s decision was not arbitrary. The court directed the Petitioners to cooperate with the special auditor.

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